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Recap and Outlook

December 27, 2023


What a difference a year makes.  As we wind down 2023, the S&P 500 is up 26% and the U.S. Aggregate Bond Index is up 5%.  Market gains were driven by better-than-expected corporate profits, a resilient economy, lower than expected inflation numbers and expectations that the Federal Reserve will start cutting interest rates in 2024.  This time last year, just about every market strategist and Wall Street "expert" had 2023 all wrong as they predicted another down year for the markets as we were supposed to fall into a recession and corporate profits were going to collapse.  If you recall from my Outlook last year, I was much more optimistic than most and said, “I think investors are going to be very happy in the near future for ignoring the naysayers and staying the course.”.


What worked in 2023?  Almost everything.  Large Growth stocks made up most of the market gains in 2023.  The “Magnificent Seven” as they have been called (Apple, Amazon, Tesla, Nvidia, Microsoft, Google and Meta) were up a collective 100% for the year.  I was overweight this sector coming into the year as they were one of the most beaten down sectors of 2022 but also contained some of the most profitable and financially stable companies in the world.  Large Growth stocks had a record year as far as outperformance vs Large Value, beating the latter category by a margin of over 30%.  The bond market also saw a resurgence in the last couple months of the year as the yield on the 10-year Treasury plummeted, pushing bond prices higher.  I decided to add to bonds in portfolios at the end of the summer and again in October with the expectation of potential double digit returns in the next 12 - 18 months.  Those positions are up by almost 9% at the time of this writing.  I was encouraged to see the markets broaden out in the 4th quarter when the Federal Reserve hinted at rate cuts in 2024.  The laggards within the market (consumer staples, financials, healthcare along with Mid and Small Cap stocks) began to play catch-up to the Large Growth category.  This is a trend that I believe will likely continue into 2024. 


What can we expect for 2024?  As of today, the consensus earnings growth estimates for 2024 is 10% (Technology companies expected to grow earnings by 17%).  All else being equal, and barring any unforeseen events, the stock market should follow earnings and increase roughly 10%.  We all know that it never quite works out that way.  In my opinion, the biggest risk we face in 2024 is a reacceleration of inflation that would take FED rate cuts off the table and put a rate hike or two back on the table, neither of which would be good for the markets.  The good news is that inflation has moved lower and so far, it appears that the trend will continue.   Economic growth next year will also likely trend lower, and I cannot rule out a mild recession.  That being said, because the markets are forward looking, I feel the markets would likely look through any economic weakness and look forward to more potential rate cuts by the FED to fuel future growth.  We could easily see stocks and bonds rally in that scenario.  We have a couple technical factors also in the market’s favor.  According to Zack’s Research, since 1944 the S&P 500 has had only had two down years in an election year.  This included 2000 (dot com bubble) and 2008, the Great Recession.  Looking past those two years, the S&P 500 had average returns of 11.28% during election years.  The other factor I am keeping an eye on is cash levels among portfolio managers.  According to BlackRock, there were over $100 billion outflows from stock funds in 2023.  Many investors completely missed the market rally in 2023 and, along with portfolio managers, will likely resort to playing “catch-up” in 2024.  Historically, the markets have done very well following a year with negative flows into stocks and higher than average cash positions within portfolios.  My base case for 2024 is slow, but positive economic growth (fueled by investments in and productivity gains from Artificial Intelligence), lower interest rates and another attractive year for investors.  I feel we will likely see increases in volatility in 2024 as 2023 was an abnormally tame year.  If you have been following me over the years, I view volatility as opportunity! 


Entering 2024, I am neutral to slightly overweight stocks vs bonds.  I am overweight large companies vs. small and have large overweight of Domestic vs foreign stocks (Foreign stocks are getting a little more attractive, but I continue to prefer U.S.) and I am overweight Growth stocks relative to Value stocks by a wide margin but will likely reduce the overweight slightly.  I do not think we will see another record year of relative outperformance of Large Growth, but it is my opinion they will still have the strongest profit growth in 2024 and are some of the most financially stable companies in the world.  There is a crude saying on Wall Street…Pigs get fat, but Hogs get slaughtered.  In other words, don’t be too greedy.  After 50% plus returns in our Large Growth holdings, I will be taking some profits in early 2024 and deploying into Large Value and/or Large Blend companies along with rebalancing all portfolios.


I want to thank you for your continued trust, and I wish you and your family a Happy New Year!


Please let me know if you have any questions.